How digital ecosystems could expand the horizons of the CRE sector

Rapid progress in digitalisation is transforming operating models and supply chains and creating new digital ecosystems. The commercial real estate (CRE) industry has much to learn and gain from this new digitalisation era.

Driving this transformation are two entwined trends. First, emerging technologies like big data analytics, cloud computing, and the Internet of Things (IoT) have sharply fallen in cost and risen in power. These technological is enabling companies to collect, store, categorise and analyse greater amounts of data than ever before which in turn is enabling sectors like CRE to meet institutional class expectations for real-time data and analytics to better inform decision-making anytime, anyplace, anywhere. Concurrently, more exacting expectations on the part of consumers, clients, employees, business partners, investors are forcing companies to develop more reliable and responsive systems to deliver operational excellence. This confluence of forces is the backdrop for the emerging fourth industrial revolution, commonly known as Industry 4.0.

In this next instalment of new mini series of articles exploring the impact of the digitalisation in the CRE sector, we consider the ‘second-stage’ of digitalisation. In the previous article we focused on the first stage of digitalisation – this is where firms use new technologies to optimise existing processes, reduce costs, improve performance and break down internal departmental silos to enhance collaboration. This can be applied to the management of a building, a portfolio, or a segment of the real estate value chain.

The second stage of digitalisation is focused on extending the value chain itself – deeper and farther – and takes place in two stages. First, this involves extending value chains to the customers of your customer. Second, this involves extending value chains across complimentary adjacent sectors creating new multi-sector digital ecosystems. Let us first consider this in practice outside the direct CRE investment management industry.

Case study: digital ecosystems in e-commerce

Consider the rise of e-commerce, itself a function of technology innovations notably the smartphone. E-commerce has forced retailers to restructure their supply chains to compete in the digital age which has prompted retailers to redefine their real estate strategies – from store locations and footprint, to warehousing, logistics and fulfilment.

Consumers, armed with superior competitive product intelligence on their smartphones, can negotiate more effectively, demand better service and shop globally due to the efficiency of retailers’ omnichannel distribution channels. The net effect is a reduction in retailers’ capital-intensive real estate footprint with funds redirected into developing new channels to reach customers, improving logistics and developing warehousing and fulfilment strategies. The partnership designed by DHL Parcel, Amazon and Audi is an example of a solution which applies new technologies to meet rising consumer demands in a multi-sector digital ecosystem.

In 2015, the three firms launched a Germany-wide pilot project to enable Audi owners to use their vehicle as mobile delivery addresses for their parcel shipments – enabled via a smartphone app. A logistic company, an online retailer and a manufacturing company – all with their own economic interests – shared networks, data, costs and profit to keep pace with consumers rising expectations of service, execution and visibility. The data shared by the partners also provides ‘demand dynamics’ – informing retailers what, when and are where products are needed in real-time. The success of the partnership spawned extensions and imitations. DHL and Amazon extended the program to include Daimler cars in September 2016. In the UK, John Lewis teamed up with Jaguar Land Rover’s mobility and venture arm InMotion to trial a similar delivery service.

The supply chain industry is far ahead of the CRE sector in developing these collaborative networks. It relies heavily on creating the sharing infrastructure to understand what is shared and how so that everyone is comfortable. Lisa Harrington, President, Lharrington group told XploreMarkets: “The premise behind these supply chain ecosystems is ‘if we can all share information, we can all learn and make the supply chain more effective, efficient and profitable. We all benefit as an ecosystem as opposed to ‘I win and you lose’.”

Harrington believes the CRE sector could learn from collaborative networks in the supply chain industry. She has written a paper, in partnership with DHL, on collaborative networks in the supply chain industry dubbed Business Collective 1.0. Harrington writes: “Business Collective 1.0 is a simple idea. Multiple organizations meld together to face the market as one single commercial entity. They eliminate the barriers that traditionally separated not just internal departments, but external partners up and down the supply chain. In this new ecosystem, a collective of organisations align on a shared mission and competitive strategy; and work together to capitalise on their strengths and overcome weaknesses.”

In the report, entitled Partnering Reborn, Harrington quotes Frank Vorrath, Vice President, Global Supply Chain at Johnson Controls, who claims: “We have reached the limits of what transactional relationships can do. We must now take the approach of truly integrating – everyone becoming part of a unified business strategy and a unified front to face the competition and thrive. This means companies must open their books and doors in ways they never did before. All parties must step up their level of investments – in systems, people, process and infrastructure to support this business collective strategy. Companies and their service providers must shift from transactional relationships… to new strategic partnerships that create value for everyone.”

In a sector like CRE – known for fiercely protecting ‘proprietary data’ and hoarding, rather than sharing – collaborative networks or the Business Collective 1.0. approach to business may not seem at first thought realistic. But the potential is certainly there.

Creating a digital ecosystem in real estate

Imagine a group of developers, architects and investors pooling information on new buildings: from smart offices and factories to retail-fulfillment centre hybrids. Members of the new ecosystem could map all their solutions: types of building; designs that works (and those that didn’t); data on operational and environmental performance of building; technology innovations that were cost effective and drove bottom line cost savings and improved performance. All this information could be catalogued in an easily searchable central repository.

Developers could then tailor occupiers’ requirements with the aid of an ever-expanding library of information informing members of the network with the pros and cons of each building type – supported with data detailing refurbishment/development costs, building running costs, environmental performance and customer experience. All aided by data sharing, smart sensors in a collaborative digital network.

“I think that is certainly a real proposition,” said Harrington. “It would raise the bar on the development process as a whole. All that knowledge digitalised, categorised, and searchable – it would save time and money for all parties involved. It would be interesting to see who would be the lead on this. I think it is an opportunity for the commercial real estate folks to take a lead role on this because their business has gone beyond bricks and mortar – they need a differentiator and I could see this being a value add proposition.”

How else could digital ecosystems form in the CRE sector?

Collaborative networks between CRE owners and tenants are unlikely to emerge in the near term. This is because shared networks work best in a partnership of equals. One the one hand, landlords – and the real estate sector at large – would stand to gain a great deal from integration into the ecosystems of occupiers. All the information would be valuable in understanding how buildings are being used – as well as how it compares between different sized companies and industries. This information could be mapped and categorised by: building use, design, technology fit-out, environmental efficiency etc, to optimise standards. This information would provide valuable insights in understanding tenant requirements of the future. Real estate managers could use this information for future building development and refurbishment, improving their understanding of how to optimize building performance and also how to retain and increase value.

But the CRE sector would need to give something back to be privy to that digital ecosystem. There must be an equal benefit. Market trends, space availability and analytics might not be a powerful enough proposition to convince companies to let their landlords in the ecosystem. However, we can imagine a scenario in which a mature, collaborative digital CRE ecosystem – with much deeper information and analytics – may connect with occupier ecosystems intermittently in a mutually beneficial data exchange.

First to the digital CRE ecosystem itself. A collaborative network comprised of CRE owners, financiers and advisors could encourage cross-pollination of data, insights, people and ideas. Increased connectivity would provide organisations with direct access to people, skills, services, knowledge, capital and other resources in ways that were previously restricted or not possible. Such a collaborative network would further increase transparency in CRE, enable owners to identify leasing opportunities directly with tenants while tenants will be able to make better-informed decisions at lower cost. At a more mature stage, a digital CRE ecosystem would evolve to become an information provider able provide dynamic insights on market trends – investment, capital flows, yields, loan pricing, demographics, talent hotspots, building performance. At this level of maturity, if it were ever to be realised, there could be intermittent periods when digital ecosystems of different industries collaborated to inform each other on business developments and deeper market trends. All for mutual benefit, of course.

Consider a small to medium sized company which does not have the time, money or inclination to develop an internal real estate division. Such a firm could connect with a digital CRE ecosystem to understand the pros and cons of building design, size, technology application, smart sensors, collaboration architecture. Whether the building was a smart office, factory or hybrid retail-fulfilment centre, a mature digital ecosystem would be able to provide invaluable data, metrics and benchmarks.

This is the strategic direction of industry. For the CRE sector, the challenge is to find ways to reap the benefits of digitalisation and collaborative networks in a manner which supportive of their commercial interests and advances wider value creation. Smart CRE landlords, asset managers and advisers will seek to harmonise everything across an extended digital ecosystem – interconnecting business processes, systems, data, people, and things. This level of digitalisation will enable business process automation, organisational flexibility, leading to the digital management of corporate assets that are more flexible, open, agile, and are supportive to emerging collaborative digital models of the future.